BHP Billiton Ltd still likes giant Saskatchewan potash project, but not in any hurry to develop

The world’s biggest mining company says it is still keen to build the world’s biggest potash mine, despite a severe bear market in the crop nutrient.

But it sure doesn’t seem to be in a hurry.

Andrew Mackenzie, BHP Billiton Ltd.’s chief executive, told investors on Tuesday that he doesn’t expect the potash market to make a serious recovery until the early 2020s.

“It’s a long way off,” he said on a conference call to discuss half-year earnings.

Melbourne, Australia-based BHP is in the midst of a US$2.6-billion investment to build production shafts at its Jansen project in Saskatchewan. Jansen would be a game-changer in the industry, as BHP is aiming to produce eight million tonnes of potash a year, which would amount to nearly 15 per cent of global supply.

However, it will require many more billions of dollars to actually bring the project to production. Analysts and investors are skeptical that BHP’s board will approve Jansen anytime soon, or indeed if it ever will. At current potash prices, nobody thinks the mine makes sense.

Mackenzie said BHP is moving at a “relatively slow rate” at Jansen, and will probably not be ready for a push to production until the potash market recovers. Given that BHP doesn’t see that happening until the 2020s, production remains a long way away.

The shaft sinking, which was approved in August 2013, was 54 per cent complete at the end of December.

“Shaft sinking at the project continues, though BHP seems to continue the go-slow track at Jansen it has been on for years,” said Joel Jackson, analyst at BMO Capital Markets.

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Jansen is clearly not a priority for the company. Mackenzie noted that Dean Dalla Valle, the BHP executive in charge of Jansen, has relocated to Brazil in order to lead the company’s response to the disaster at its Samarco mine. Samarco’s tailings dam burst last November, killing at least 17 people and causing massive environmental damage.

“(Valle’s) keeping a weather eye on our potash project because he’s in the same time zone, but I think that’s about one per cent of his time,” Mackenzie said.

Nonetheless, BHP said it is committed to the project. The company told analysts that it still likes the long-term outlook for potash, it likes the resource at Jansen and it sees a lot of options to expand production over time.

The potash market is suffering because of oversupply and growing competition between producers. Prices, which peaked at more than US$900 in 2008, are now mired below US$270. Demand has not grown nearly as fast as the producers expected over the last decade.

The bear market has forced potash companies to respond. Last month, Potash Corp. of Saskatchewan Inc. shuttered its New Brunswick operation and cut 430 jobs.

The economics of Jansen remain a mystery. BHP has not released any estimates of what the project would cost, or what potash price would be required to generate a decent return. Analysts have estimated that the company would have to spend US$14 billion or more to produce eight million tonnes a year, though it could start with a smaller operation and gradually expand.

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